Andrew Couch: How to pay for climate change mitigation

About one-third of Auckland Council’s operating and capital budgets go to transport. Photo / Michael Craig

OPINION:

The consultation period for Auckland Council budget and general rates increases finished last week and it will be interesting to see the results.

The transport analyst is concerned about how the $125 million of cost savings required by Auckland Council will play out for public transport. The budget requirements are not surprising – the Mayor and several commentators have warned about this in one way or another.

Digging into the detail you can see the effects of the post-Covid inflationary environment coming through in the cost of public services. For example, waste collection services are suffering cost inflation in excess of 10 per cent.

The current state of Auckland Council’s budget and financing is bound to feed through to Auckland Transport given around one-third of the council’s operating and capital budgets go to transport.

The consultation document admits public transport services will at best retain the current (already reduced) service levels.

Right at the end, Auckland Council states: “If further savings are required, this will likely require a significant reduction in public transport services compared to the currently committed schedule”.

I admire the reality check – if general rates are not raised then public transport service levels (and other public services of course) will decline. We also need to be cognisant of the current market factors that are against us – continued bus driver shortages despite wage levels for bus drivers at around $30 per hour.

I don’t like to say it, but expect further declines in public transport service levels this year.

On the whole, it my view that this is not to do with Auckland Transport but more a function of structural issues such as the large size and low population density of Auckland, mistakes made decades ago and the general market failure in public transport – the subsidised public transport model has not been able to compete with the private car in most large, international cities.

However, there is still a large and growing problem that we need to make public transport work if we are to meet our emission targets.

The Auckland Transport Emission Reduction Plan (TERP) indicates a rise of fivefold in public transport patronage is required to meet its climate change mitigation action in transport by 2030 - and here we are in 2023 with declines.

Where will the money come from?

Very significant investment is going to be required in public transport and it would appear that local authorities like Auckland Council do not have the means to fund it. So where will the money come from?

One further source of funding is the National Land Transport Fund (NLTF), a very favourable feature of the transport system that ringfences funding (raised from petrol excise duties, vehicle licensing and road user charges) for transport investment.

This structure is something New Zealand should never let go of as it facilitates long-term decision making and a degree of independence for the funding agency, Waka Kotahi.

This is going to be crucial during the massive changes that will happen in transport in the next decade, including the rise of public transport. The NLTF can make contributions to regional local authorities like Auckland Transport for public transport, typically at a rate of 51 per cent of the project value.

Theoretically, the NLTF contributions could also be raised to make up the balance for public transport investment, but unfortunately this is could be difficult.

The NLTF has its own problems as we go through the transition to clean energy solutions as over the long term, the funding model will have to rely much more on Road User Charges (RUC).

In the short term, the NLTF is also subject to equivalent inflationary pressures that are most acute in the transport sector, not to mention the burden presented by weather-related events so close to our hearts at the moment. So no help here.

More green bonds

The ray of light is the advent of the green bonds programme launched by the NZ Treasury in November last year. These green bonds have been a growing presence in international markets since their beginnings in 2007 and global market has reached US$2 trillion - $400 billion of issuance last year. New Zealand issued $3b of these bonds in November and I hope this is just the start.

The structure of a green bond includes strict criteria as to where the proceeds of the bonds issue can be applied, essentially sustainable investments.

With transport being a large contributor to NZ greenhouse gas emissions, it is top of the agenda for clean investment, including public transport.

For example, Treasury information at the time of the issue specified the Auckland City Rail Link (CRL) as a case study of something that would be funded out of the green bond issue proceeds. For the transport analyst, more funding for public transport out of green bonds is a boon – it is large source of potential funds with lower funding costs than the local authority can achieve.

On the other hand, more centrally-funded projects can be subject to greater political influence and may mean local factors are not so easy to consider.

Easter holiday traffic heading north in Albany, Auckland. Photo / Sylvie Whinray

One feature of the green bonds structure is that they specify the types of projects permitted under various sustainability criteria – but not outcomes or targets. For example, there is no link to the official targets such as the greenhouse gas milestones in the Emissions Reduction Plan.

There is a subset of green bonds called Sustainability-Linked Bonds (SLB) specifying key performance indicators and a time horizon over which these KPIs must be met.

So far, these SLBs have mainly been issued by corporates to help them commit to sustainability goals, and in response to increasing investor pressure around sustainability. Only a very few governments including Chile and Uruguay have issued them.

The SLBs are more complex. For example, they need careful measurement of the KPI criteria. However, there is the chance to extend the depth of our domestic bonds market by setting a bond issue programme related to a sustainability target.

This is a way to use our international reputation and showcase our green credentials – one of a handful of countries that can boast a high percentage of renewable energy generation.

Acceleration of the green bonds programme and judicious use of Sustainability-Linked Bonds is a way of getting the transition required in public transport, and other areas of infrastructure – where we know we are underinvested.

• Dr Andrew Couch works at Abley as a transport business case writer and also owns Kara, a ridepool company.